At present in the UK we have a tax system that discriminates against families. CARE’s most recent research showed that at the average OECD wage (£36,571) the tax burden on one-earner married couples with two children is 20 per cent higher than the OECD average. This is an extraordinary figure. The unfavourable position of single-earner families is mainly due to the fact that our income tax system does not take any real account of marriage or family responsibilities.
To understand how we got into this mess, we need to go back in time. Income tax was formally introduced in 1842. Back then, for the purposes of tax, the income of a married woman was treated as that of her husband’s. When the Conservatives came into power in 1979, it was felt that change was needed. The times had moved on and besides, the way a married woman’s income was treated raised privacy concerns.
First, Geoffrey Howe acted to deal with the staggeringly high rates of income tax (the top rate was then 83 per cent). He also abolished the investment income surcharge. After Howe came Nigel Lawson and he set himself the task of dealing with the deeper rooted structural problems in the tax system.
Clearly the issue of a married woman’s income and the lack of privacy connected to that was a priority. But Lawson also wanted to address the fact that a married couple who were both in paid work, or if only the wife was, received around 2.6 times the single person’s allowance while a married couple where only the husband was in paid work got 1.6 times that allowance. So, a married woman’s investment income was unfair, and marriage was penalised in the tax system.
In 1986, Lawson laid out plans to raise tax thresholds in a cost-effective way to help families with low incomes. Everyone should have a tax allowance, Lawson argued, regardless of whether they were in paid work. Recognising the shared responsibilities of a married couple when one spouse had insufficient income to use all that allowance, Lawson suggested he or she should be allowed to transfer the balance to the partner. In effect, Lawson wanted transferable allowances.
But transferable allowances were never introduced. As to why it never happened, there are a variety of opinions. But the point is that in 1988, Lawson announced a system of independent taxation. Whatever your employment status, or your relationship status, everyone had the same personal allowance. Recognising that married couples might lose out under this new system, Lawson did introduce a Married Couples Allowance. An Additional Personal Allowance was also introduced for single parents and cohabiting parents.
But these allowances were gradually reduced in value before Gordon Brown abolished them altogether in 1999. In their place, we eventually got the present system of tax credits and child tax credits. However, the fundamental issue, that the tax system remains biased against families, has still not been adequately addressed. The result is that the UK is a cold place for families. CARE research shows that the income tax burden is 70 per cent more for a one-earner married family in the UK than an equivalent French family. It’s twice as much as for the equivalent US family and 15 times as much as for an equivalent German family.
Rather than tackle the ongoing structural issues in our tax system, the government continues to pursue an approach that sees increases to the personal allowance. It’s set to rise to £12,500 by 2020. According to the Treasury the habitual increases in the tax-free allowance have cost around £19billion. This expensive experiment has not helped to reduce the unfair tax burden on families. Again, CARE’s latest research shows families face the highest marginal tax rates in the western world.
It is true that in April 2015, a transferable allowance was introduced for married couples and civil partners, but not cohabiting partners. For years, CARE has been making the case for just such an allowance. But the allowance is set at only 10 per cent and applies only if the receiving spouse is a basic tax payer. Recent figures show one million eligible couples have not signed up. Can we really blame them? As CARE has long argued, making the marriage allowance fully transferable would be much more effective and help make marriage more fiscally attractive.
It’s fascinating to trace this shift in our tax system. The individualised nature of taxation has had economic consequences. But it’s contributed to social problems as well. It’s no coincidence that over the same period as the shift to a tax system that discriminates against families, we’ve also witnessed a rise in family breakdown. We also know family breakdown now costs £51billion, up from £37billion just ten years ago. If you make marriage fiscally unattractive, the result will be more cohabitation. This is fatal for the stability of family life.
In the UK today, children are more likely to own a smartphone than have a dad. Lacking proper role models, there is a notable absence of respect for authority. A major report into street gangs back in 2009 by the Centre for Social Justice identified drug use and family breakdown as the major reasons children join street gangs. Tragically, for some belonging to a gang gives a security utterly lacking in the family home. The amount of violent knife crime in London and around the country, much of it related to gang conflict, was up 21 per cent in the 12 months until September 2017.
Again, it’s no coincidence that family breakdown is having a negative effect on young people’s mental health. Research by the Marriage Foundation identifies family breakdown as the chief reason for poor mental health amongst children. Those from broken homes also often suffer from significant self-esteem issues.
The two issues – family breakdown and an overly individualised tax system – are connected. We cannot hope to address one without also tackling the other. It is morally wrong for the government to remain neutral about these problems. But for too long the government has flirted with the problem of our individualistic tax system, never taking the radical action needed. This must change. If the Treasury needs inspiration, let me offer some. It should channel the billions of pounds earmarked for yet more personal allowance increases into increasing the marriage tax allowance instead. This would not solve the problems on its own. But at least it would be a step in the right direction.